Veolia Environnement to acquire Suez

 On 16th of September Veolia Environnement announced their acquisition plan of Suez of the outstanding 70,1% of Suez shares not held by Veolia. This will create a new giant in environmental services like waste management and water. I only own 12 shares in Veolia Environnement meaning the impact to me is small. Link to Veolia Environnements investor page is here. The total acquisition price of Suez will be 9 billion euros, Veolia is striving for annual synergies of 500 million euros split between 100 million the first year and 400 million in the second year.

In order for Veolia to acquire the outstanding 70% of Suez they have launched an rights issue to shareholders. For every 21 rights you have you can acquire 4 shares in Veolia at a price of 22,70€, yet got 14 rights for the 12 shares I have, therefore I would end up with a few right that would not be used and will be worthless unless I sell them or buy more rights. I have decided the use the rights I have, still open if the excess ones will be sold or at some point. 

Veolias share closed at 32,82€ on Friday which would give me a discount of 30% to market price, something very interesting now and could be considered a good discount.

At the same time my portfolios market value has dropped below the short-term goal of 55 000€, 54 842,79€ was the closing value on Friday. A bit below target yet as I have earlier mentioned that is something that will happen from time to time. This is a good opportunity for me to review my portfolio holding, their weights and see what I find valuable to increase my positions in. By default Veolias share of my total portfolio will increase a bit.

This Fall has started with good new in my opinion, Old Republic International with their special, one-time cash dividend and now Veolia will acquire Suez.

In search for undervalued Swedish stocks

I went on a search for undervalued Swedish stocks and the result was surprising. Based on market valuation 17th of September the Stockholm stock exchange has only 10 low or undervalued stocks, most undervalued stocks according to the screen was in the investment company class. The criteria for being undervalued in this screen was the following

• P/B- ration less than 3
• P/B (most recent quarter) less than 2 
• Trailing 12 months P/E-ratio 0-20
• ROE over 15%
• ROA over 10%
• Gross margin over 40 %

Unsurprisingly the list consisted of investment firms, yet also a goldmine company. Why the list of investment firms was not surprising is partially the high gross and net margin I set. Investment firms usually have high margins until markets turn south, that is when market valuations no longer work in their favor. ROA is also something many industrial companies can have difficulty achieving as their balance sheet consists of many factories, inventories, goodwill and so on. Even though industrial companies should achieve a good return on their assets it might be that they are relatively high priced now.

It is not a surprise we see so few undervalued stocks in Sweden. The market has risen a lot and OMX Stockholm Price index is up over 26% year to date, since 2011 it has risen 242% equivalent to a CAGR of 13 % per year. In other words the broad index has given a good return to investors. But to the topic of undervalued companies..

 

Which companies did show up on the list, let me introduce Stockholms undervalued companies;

• Investor Ab
• Kinnevik Ab
• Bure Equity Ab
• Creades Ab
• VNV Global Ab
• Svolder Ab
• VEF Ab
• Ab Traction
• Kopy Goldfields Ab
• NAXS Ab

Here I will focus on only six of the ten companies, reason is that all are not interesting for me and primarily want to see what the return would have been if I invested in the company back in the days. Let me start with the biggest and oldest of them all.

Invesor AB is a known Nordic company mainly ruled by Wallenberg family. Investor has investments in many known global companies and some more niche specific and less known companies. The last 10 years Investors A share has risen 558% excluding dividends. A good return if you jumped on the stock back in 2011. If you bought a share back in September 2011 you would have received gross dividends of 23,75 SEK (adjusted for stock splits), almost as much as you would have paid for a share in the company. What might be special with Investor and the Wallenberg family is their investment policy and horizon, they see their investments as almost forever and focus on development and improvements instead of fast gain and splitting companies to quickly realize a short-term profit. 

Kinnevik Ab is an investment company, like many others they provide expertise and possibility to develop companies through the large network they have. The last 10 years the share has returned 526%, still a very good return even though a bit behind Investor Ab. Dividends since 2011 Kinnevik has paid a total of 170,40 SEK including share distributions of investments Kinnevik had. The shares they distributed have been a bit harmful for some owners as it has increased their workload to ensure they claim their right to the shares, example with Zalando. It has also been a bit confusing how to proceed and fulfill your claim for the shares Kinnevik has distributed to you. If we exclude the issues with dividends as shares, one share in Kinnevik would equal a dividend return of 224%, which means a very good total return. 

Bure Equity Ab is also a more normal investment company like Kinnevik and one very small position I have. The share has returned a staggering 1 909% in return over the last 10 years. Dividends it has paid out a total of 12 SEK and is a bit below the price you would have paid back in 2011. Bure Equity Ab is also one of the companies that now in 2021 launched a SPAC on Stockholm's stock exchange. Bure has many investments in for me unknown companies and interestingly they own a railway company, if it does not ring a bell then look at Berkshire Hathaway. Overall the return from Bure as an investment would be terrific in capital terms but not from a dividend perspective. 

Creades AB like Kinnevik and Bure Equity is a normal investment company, yet first trading day was in 2013. If you would have bought a share on the first trading day you would by today have a appreciated value of 689 %, strong growth in other words. From a dividend perspective you would be far behind with only 6,30 SEK in dividend compared to a purchase price of 13,256 SEK. From cash-flow perspective not the best but from a value appreciation perspective a solid return. Creades is also one of the companies that launched a SPAC on Stockholm stock exchange in June 2021. From Creades investments I only recognized one, apotea.se which is a pharmacy company (if you ever look at Swedish TV you eventually will see an apotea.se commercial). 

VNV Global Ab is an unknown investment firm to me, a Swedish mid cap company with an IPO back in 2007 just in time before the financial crisis. Just like the other investment firms VNV Global has many investments in companies I do not know nor have ever heard. Their investment idea seems to be utilizing network effects, assume the idea behind is good and solid as focus seems to be on value appreciation and not that much on cash flow. If you bought one share in VNV Global back in 2011 you would see a nice 1 617% value increase by today, not that bad, yet you would not have received any dividends from the company. From a value perspective the company has managed to show owners a good return in market value, yet the cash flow to investors is still open. 

Svolder Ab is an investment firm that invests in listed mid and small cap companies. Svolder could be seen as a small Investor Ab as they also invest mainly in listed companies. The idea seems to be close to the same with the difference that Svolder focuses on the mid cap and small cap companies that are not subject to a large analytic army. This way they can find value before others, or the market realizes it. One share of Svolder would have returned an awesome 1 208% for 10 years while dividends would account for about 59% of the purchase price. Interestingly Svolder announces NAV (net asset value) of their investments every week. 

Summary

As these firms are undervalued on a few indicators and have high margins I am not that confident they all will be good long run holdings. Gold mines have the issues of dependence on gold price which markets determine, not the company. This means the business is vulnerable and can be volatile, it also has the environmental issue as mines are hardly sustainable nor are they good at managing their waste. 

Investment firms value their holdings at market value, during booming markets it all looks spectacular, but as we saw in Q1 2020 it can rip large holes in their income statement. Investment firms cash flow would be a better option to analyze just as REITs have EPRA and FFO to better reflect the business health. I am not suggesting investment firms should be regulated or required to change reporting, just simply saying that it is strange they do not have a similar cash flow or operational reporting KPI. Operational performance before market valuation could give better indication of the business health.

Assume there is some lobbying behind it and finance has deep pockets, might explain a lot.

 

To shortly reflect the annual growth (CAGR) of stock price of the reviewed companies I could draw some conclusions, but not any final. 

 

Company	Stock CAGR %
Investor Ab	21 %
Kinnevik Ab	20 %
Bure Equity Ab	35 %
Creades Ab	29 %
VNV Global Ab	33 %
Svolder Ab	29 %

I am not that interested in the Swedish undervalued firms that the screen gave me. If markets fall rapidly by 20-50% I might take positions in Investor Ab or some other company and do hope that day will come in the nearest future. Was not able to find the market P/E-ratio for Sweden, would however guess it is over 25 as Western markets in general are reflecting a stimulus monetary policy. 

A review of Alibaba Group

 Since the market value of Alibaba has fallen and I have a decent amount invested in the company, I decided to make a quick review of Alibaba. How does Alibabas financials look like? What is Alibabas political risk? These questions will be answered.

Alibabas Group (ticker BABA) has fallen and shows a decent minus in my portfolio, even though only 14 shares at $216 the unrealized loss would be painful with -21% of invested amount. Link to portfolio page from where you can see the latest market price of Alibaba, its return and weight of my portfolio. 

I do not see any operational changes and I am left pondering is it something wrong with the financials or is it political. There was the sexual assault scandal at Alibaba but would not be surprised if many other big companies have the same issue however are covering it up or handling it better. Sexual harassment or assault in any way or form is not acceptable and do expect Alibaba to take required actions. 

Back to numbers.

Alibabas financials

The numbers are from Alibabas 20-F filings and are all in USD, EPS (earnings per share) are for ADS which is equivalent to 8 ordinary shares. I will quickly start with the balance sheet and then proceed to the income statement and end with some key ratios.  

Balance sheet

Alibabas balance sheet is displayed in the below graph where we see that total assets have grown every year since 2015 while the equity ratio has remained stable. Alibabas equity ratio was at lowest 51% in 2018 and 2019 only to increase to 55% in 2021. This means Alibaba is profitable and reinvesting its earning into the company. It is exceptional that a company growing at this paste would be able to remain the high equity ratio unless it does what Alibaba is doing, reinvesting earnings. In the long run if Alibaba can remain on the same path the company can grow significantly and at some point might be able to declare dividends. 

 

 Alibabas current ratio has remained good, mostly around 1,90 except 2019 when it temporarily dropped to 1,30. Still good and means the company can handle its short-term obligation without any major problems. A ratio I use to see how fast a company can be debt free is cash to liabilities ratio, basically based on 31 March 2015 annual report Alibaba could have paid all their debt with the cash at hand, making the company debt free. 

Alibabas ROE (return on equity) has been outstanding, even though the company has a high P/B-ratio. The ability to return a high return on equity is important for any company as it states is the management can utilize the assets and cash at hand. Alibabas ROE has been very good.

Income statement

The following two graphs show Alibabas revenue development and net profit development since 2015. We can see that revenue has grown at a huge rate of almost 44% per year until 2021. The graph clearly shows that the growth rate has been above 40% from 2018 meaning Alibaba has been able to grow its revenue over 40% per year for 4 years. This is a huge achievement for any company, as we look further down the net profit has not followed the same growth patter as revenue. As Alibaba develops its operations and invests back in the business, while getting fined by Chinese government we can expect the profitability to rise at a slower paste than revenue.

In the above graph is Alibaba Groups revenue in million USD per year displayed in blue columns and scale on the left axis while annual compounded revenue growth is the red line and scale on right axis.

The graph below shows how Alibabas net profit has developed since 2015 until 2021. We see a strong growth rate and spike in profitability in 2016 while returning to a more modest growth rate of 28% to 40% between 2017 and 2021. The net profit margin of Alibaba has remained strong of a minimum of 20 % of revenue (2020). A net profit margin of over 20% is very strong for any company, many times banks and financial institutions have a similar strong net profit margin.

Above graph displays Alibaba Groups net profit in million USD per year in blue columns and scale on the left axis while red line shows the compounded annual growth rate of net profit. 

Alibabas segments

Now Alibaba has four operating segments, core commerce, cloud computing, digital media and entertainment and innovation initiatives. Of the four core commerce is the biggest with almost 87% of the total revenue and the only segment with a positive operating profit and EBITA. Of all the segments Alibaba has I find cloud computing the most interesting one and the one with a huge future potential. Cloud computing covers areas like big data analytics, machine learning, storage and elastic computing. If we look at Alibabas competitors like Amazon and Microsoft, they also have recognized the value of clouds and storage of data which is a big revenue stream for them with a tasty margin. Media and entertainment look interesting and do see it as a challenger to Western as well as locally in Asia as a possible profitable business, it will just take time and a few big hits.

P/E-ratio

Alibabas has a high P/E-ratio of 20,13 given the stock price of $168,10 and the last earnings per share of $8,35. Considering a tech-company and the growth opportunity the ratio is modest yet reflects the political risk associated with Alibaba.

Alibabas financials discussed

 Based on normal financial KPI’s (key performance indicators) Alibaba can be considered a bit expensive. At least P/B- ratio is very high at current market value. However, P/E-ratio is on a more moderate level for a company growing in the same speed. A fact that must be faced is that no company can grow forever and that needs to be considered in Alibabas case. To sum it up I still see Alibaba from a financial perspective a valuable company which will contribute with growth to my portfolio in the long run.

Political risk

Currently the biggest risk with Alibaba would be political or Chinese government in my opinion. The Chinese government has hit hard on different tech companies by adding legislation and forcing reduction of dominant position. This risk is reflected in market value and seems like many are expecting future fines and less profitable business. My opinion is that the market reaction is short sighted, and that Alibaba will recover just like rest of Chinese tech companies. Reason lies in Chinese government not wanting to scare businesses away as it employees and ensures discipline among citizen. If people have a job, they are less eager to rise against authority and governments limiting business loose tax revenue. I see the Chinese government regulation tech companies to ensure nobody gets a monopoly, which is good. Some companies do start with predatory pricing to remove competition only to raise prices afterwards. 

Let us see what the actual outcome of government actions will be and how hard it will hit Alibaba.

Conclusion

My conclusion is that I will not sell my Alibaba shares as I see a good future. There will most likely be days when the market value is below current value of $168,10 and days it is above. The business will continue and they will come up with good future solutions and value generating services for customers. I will continue to hold my shares in Alibaba if the business changes I will have to review it and my position.

Portfolio Update August 2021

 August was an interesting month, my portfolio value was stable above 55 000 euros which is good from my goal perspective. The increased positions in Bayer AG contributed with better margin to the short-term goal. If markets start to panic then my portfolio will fall below the 55 000 euro threshold, yet in the long run it does not matter that much. 

Focus has lately been to summarize annual reports and find new value opportunities. It has been hard to find value as many companies are valued at high multiples, meaning a long payback period.

I mentioned in my last portfolio update from July that I might consider liquidating some positions. I am still weighting the benefits and costs from having these positions and if some would be liquidated and funds used to increase other positions. The issue I am facing is when to sell and at what price, probably one of the most difficult questions ever in investing. For example, if I would have had some GameStop shares when the stock started to fly I would have exited it way below its high at $483, most likely bought around $2 and sold at $10.

Graph below displays gap to goals in portfolio value. Left axis is for short and long-term goal while right axis is to the ultimate 1-million-euro goal. As you can see the gap to short-term goal is zero.

Markets were behaving interestingly in August, Corona cases, interest rates, employment numbers and inflation pressure has caused some headaches to many. Especially inflation pressure has been a hot topic for a while, and I do see prices rising. Question is then, will prices rise and keep on rising to a extent that forces Central Banks to raise interest rates? It might happen, especially in the USA however Euro area seem to be struggling in different ways that might postpone rate hikes.

Taliban's taking over Afghanistan did seem to impact markets for a second only to be forgotten due to limited impact on global economy. We saw new all-time highs for some indexes, partially supported by low interest rates and good Q2 results but also future expectations.

Portfolio Changes

Small changes during August as still awaiting better moments to increase my positions in a few companies. Was also a bit short on cash at hand which limited the possibility to buy more stocks. In total I purchased shares for 285,64€ in August which is a small amount.  

Alibaba (ticker BABA)

Weighted average purchase price decreased from $216,68 to $212,98 as one share was bought for $159,50, not the best price in August but of value for me. Alibaba has been hit by a lot of challenges, Chinese government, sexual scandal and challenges with US Securities and Exchange Commission. As I have been increasing my position it might be a clear statement that I still believe the value of Alibaba to increase over time. I do see more value in Alibaba then many hype stocks as they have more tangible services and products and are not dependent on hypothetical future development.

Bayer (ticker BAYN)

Bought 3 shares of Bayer AG during August, main reason is that I still expect its future to be brighter than what we currently see. As the legal claims regarding Roundup! and Monsanto acquisition will dissappere the future of Bayer will be brighter and earnings stronger. The weighted average purchase price decreased from 62,14€ to 61,12€ per share. Still a way to go when market closed at 47,20€ on Friday September 3rd. If I would have a average price around 50€ per share I would be happy so will most likely continue to buy more.

Dividends 

In August I received 73,54€ in net dividends and on a year-to-date basis 1 086,59€ in net dividends. Still far from 2 200€ which is my short-term goal, as the portfolio is being built up on a long-term basis (including taking advantage of any short-term bargains) it might be that the dividend goal will not be reached next year. 

 The graph below displays monthly dividends (blue staples) and cumulative dividends from start (red line).

Regarding the dividends, note that AT&T dividend does not reflect the full position of 121 shares as 5 shares were acquired after ex-dividend date. AT&T has also the split of WarnerMedia to come which based on statements will reduce the dividend by around 50%. This will have a negative impact on dividends unless Warner Bros Discovery can compensate. Do see it a bit challenged as Discovery has not paid any dividends on common stock for some time.

 

Positive surprise from Old Republic International

 Old Republic International has again surprised its owners with a special one-time dividend of $1,50 per share, payable to shareholders on October 6th 2021 with a ex-dividend date of 14th September 2021. For me this means an additional dividend of $105 gross dividend and $89,25 net of withholding tax. 

This is good news for shareholders and my short-term dividend goal of 2 200€ per year. I am still behind on my dividend goal, however Old Republics additional dividend can boost my investments a bit to ensure I should achieve the goal 2022, well ahead of the set deadline 2025. 

One challenge I find with the one-time special dividend from Old Republic is the challenge to find companies that pay a good dividend (dividend rate = dividend / stock price). For me it looks like the Board of Old Republic has the same issue, they see there is a challenge to find good investments and have therefore decided to distribute additional cash to shareholders. This is a very good practice from the Board and Managers, and I appreciate them for it. The way they work seems to be close to Warren Buffett's and Charlie Mungers principles, if you do not find good alternatives for your excess cash then distribute it to shareholders or buy back your share (Berkshire Hathaway has bought back B shares for some time now). There is a difference as Berkshire Hathaway had approximately 39 billion USD in cash and 102 billion USD in short term US treasury bills, equivalent to 141 billion USD in cash per 30th June 2021 (about 15% of total assets).

Now I face the challenge to find one or a few investments for the dividend, I do have some in mind which will show up in November once I update my portfolio. I will still follow my normal investment principle, by looking at my older posts you might figure out what I will do. 

Overall good news for Old Republic International shareholders and hopefully the company can continue to delivery good returns in the future.

A review of Nokia; The Rise, Fall and "Rise" of a Tech Giant

The first company I will review is technology giant Nokia. A lot has been said about Nokia, from praised to almost hated by some. Many made money and a lot lost when IT-bubble burst back in 2000. If you owned Nokia options and sold them at the right time you did make a lot of money in a short period.

The setup is Nokias history followed by biggest mergers & acquisitions, after that we will touch the financials for last 18 years and look at if you should have been an owner versus Nokia manager or board member. Before summarizing the post, I will display how I made a little of money of Nokia stock, a few old trades. 

Nokias History, From a Paper Mill to Tech Giant

Nokia has a long history, and it might surprise you that Nokia started as a paper mill in 1865. In 1898 Finnish Rubber Works was established followed by introduction of electricity in Finland, a company named Finnish Cable Work was established in 1912. These three companies were merged into one in 1966, the new company name was Nokia. During this time Nokia was in several industries, integrated cable, electronics, tires and rubber footwear. 

In 1979 Nokia and Salora founded a joint venture called Mobira (derived from mobile and radiophone) which focused on developing what was then called radio phones.

Since 1990 Nokia recognized the potential in mobile phones and started heavily investing and developing phones. Nokia got some publicity when Mihail Gorbachev called his communication minister from a Mobiara phone in 1989. After this the phones started to develop in a very fast paste, 2004 Nokia launched its first touchscreen phone, the Nokia 7710.

In Q4 2004 Nokia had a 34% market share of shipped phones, equivalent to about 66 million, only to sell about 3,8 million in Q3 2019. Today Nokia has a licensing agreement with HMD Global to manufacture Nokia phones, number of phones are not on the same level as during the hay days.

What also needs to be highlighted is the number of companies that today are listed or part of another company and once were a part of Nokia. Examples like Airam, Nokian Tyres, Essity (soft tissue division), PKC Group, Kemira Chemicals (part of Kemira group) and Grid Solutions (part of General Electric Grid Solutions). Nokia has been listed at Helsinki Stock Exchange since 1912 and in New York since 1994. If you would have received the shares in these companies you most likely would not have to work today (for the fire people).

Biggest Acquisitions & Divestments

Nokia has made a lot of acquisitions and divestments over the years, therefore we shall focus on the main acquisitions and divestments. You can have a closer look at smaller acquisitions and divestments on Nokias website.

The company has many big leaps over the years, from a papermill to dominant phone maker ending up as a network company today. Looking a bit closer at acquisitions and sold divisions we see a lot of interesting moves. One of the biggest acquisitions was Alcatel-Lucent back in 2015 for 15,66 billion EUR (announced April 15, 2015), which apparently has not delivered the promised synergies. 

2014 The big move

On April 25th 2014 Nokia sold its Devices and Services (mobile phones) unit to Microsoft in for 5,44 billion EUR, a really good price considering what market share Nokia phones had at that time. Eventually Microsoft did not see any use of the mobile devices purchased from Nokia.

2015 Maps out, France in

HERE was sold at the end of 2015 for 2,55 billion euros to Audi, BMW and Daimler (maker of Mercedes cars), HERE was Nokias mapping, navigation and location program

15 April 2015 Nokia announced its acquisition of Alcatel-Lucent at a cost of 15,6 billion euros, the acquisition was made as an all-share acquisition while Nokias share was at 7,77€. As stated on the press release, they targeted a reduced interest expenses by 200 million a year and 900 million euros in operating synergies, sales would land at 25,9 billion euros. Maybe some of the targets were met however they need to pick up on sales and profitability.

Nokia Financials and Dividends, From Good to Disastrous to what is wrong with this company bathing in cash?

In this section we look at Nokias financials and compare who the winner in the company is, is it the Board of Directors, Management Team or Shareholders who have gained the most. A big NOTE, only IFRS numbers have been gathered and each years numbers are according to that years annual report published on Nokias investors page. Do not look at the non-IFRS numbers as by now people should have learned, that is why Risto Siilasmaa was fired, apologies he was escorted out or requested to leave...

On October 24th 2019 Nokias Board of Directors decided not to continue distributing any dividends, discontinued the dividend, reasons were

1. Guarantee increase of 5G investments 
2. Guarantee Nokias cash position
   
3. Continue investing in growth in strategic areas such as enterprise and software
   

This decision frees up time and pressure from both Board Members and Management Team, if there is no pressure to deliver then time for laziness will proceed. 

On December 3rd 2019 Chairman of the Board Risto Silasmaa "resigned " after it was clear the board was looking at wrong numbers. It also weakened ex-CEO Rajev Suris position. Questioning internal reporting and reliability of numbers. What needs to be stated is the use of non-IFRS numbers in Nokias reporting. Sari Baldauf will continue as the new Chairman of Nokia from start of annual general meeting in 2020.

My question is therefore, how much value if any has the management group and the board of directors created for shareholders versus how much have they earned during the same period? 

This is a simplified question and example, yet one I have not heard anyone ask as it is sensitive. Question is also raised as my opinion is not to reward bad performance with perks, salary and fat bonus, that’s what I call skewed rewarding. 

When reading Nokia's annual reports it is a bit confusing what has actually been the total compensation to Management Team in shares and in base salary and other compensations. They have partially separated the President and CEOs salary and partially bulked together share compensation with the rest of the Management Team. The main issue I find in Nokias reporting set up is the unclarity in management compensation, fortunately Board of Directors compensations are the only clear and detailed information you get (except for 2016 and 2015). Guess shareholder are seen as second-class people based on Nokias reporting standards. 

Below are some of Nokias numbers summarized. Equity per share (excl. non-controlling interest), ROE (return on equity) and cash & cash equivalents per share. Equity per share has dropped due to poor performance while cash per share has increased coming from sales of business, mainly mobile devices. ROE swings a lot due to the volatile performance. What we can see is the impact from iPhone hitting Nokias profitability starting in 2007. Since iPhone was launched, we can roughly state that Nokia has not been profitable except when selling businesses. I would assume Samsung with their Galaxy models also destroyed Nokias phones. If I was a Nokia shareholder I would be worried that the company has not been profitable since 2007. This means the company has issues it needs to fix as soon as possible. Would also demand the Alcatel-Lucent synergies to be better highlighted and if there are none (which it looks like), then admit it has been a failure from some perspective.

Below we see R&D expenses (impacting income statement), retained earnings and cash & cash equivalents. An argument why Nokia should not pay a dividend could be the negative retained earnings. This argument is valid, however with over 6 billion euros in cash you can distribute some of it to shareholders without risking the whole company. Earlir stated the increased 5G investments are a little confusing, they had sold 5G already so why do they need to invest more in a product they already have made and does it really cost that much?

Owners Return

One note, the result may and will vary depending on which period is chosen. I chose the period end December 2004 to October 2020 as I wanted to display the long run return to shareholders and reduce the impact from overvalued periods such as the IT-bubble. I personally bought shares back in 2013 and 2019 only to sell them within the same year. Have to say it was profitable and a short-term investors wet dream. 

In order to give some examples on what return you as a shareholder have received, I have chosen two different dates, just for fun. The first date is 3 September 2013, as BBC had an article "Nokia: The rise and fall of a mobile giant", the stock opened at 4,36€ and closed at 3,97€. I will pick a stock price in between, 4,16€ shall do for this example. For the second date we will go further back, all the way to 2004, December 15th 2004 Financial Times article named "Nokia Bounces Back In Mobile Phone Sales", on this date the stock was at a high of 11,90€ and low of 11,71€, closing at 11,71€. Would say that based on the article by Financial Times some might have bought for say 11,89€ a share. We will go with the 11,89€ price per share. 

 

As the graph shows just holding Nokia stock since 2004 would have been a bad investment and result in a loss up to 70 % of your investment while investing in 2013 resulted in -13%. Taking into account received dividends the result has been a bit different, the 2004 investment would still be at around -66% while 2013 would show a gain of 16% (before tax and not reinvested). Dividends since 2004 would total 4,29€ gross and 1,23€ if you invested in 2013. Note 2003 result dividends were paid in 2004 and so on.

 

If you bought back in 2004 you had a chance to temporarily exit at around 28,60€ on November 6th 2007, only to buy it back 2008. This way you would still be on the profitable side even though the share price has declined a lot. Note that Apple launched iPhone back in January 9th 2007. 

If you sat on the board of Nokia or was one of the members in the management team you would be in a better situation. Management Team compensation in MEUR can be seen on the left axis and Board compensation on the right axis. As we see management team has partially compensation linked to the result while the board has seen a steady increase while the company has underperformed. I know many argue you must pay to get the best. I disagree with that statement, the best is not driven solely by money, but by the chance to make an impact and improve. It gives them pride and acknowledgement. The ones driven by money will only try to maximize their share whatever the cost, and that price is for the shareholders to pay. Here Nokia seems to be a good example. I do conclude it has been better to sit on the Board or in the management team of Nokia then to be a shareholder. We also have to note that the numbers given are absolute and not per person adjusted. Per person adjusted could give a better picture and there the board members have seen a compensation increase of almost 3,9% per year (2012 to 2019 as 2020 isimpacted by one small meeting fee). Not bad compensation increase given the performance. The management team has more volatile salary as they have more result oriented compensation. On average they have seen an increase of 7,6% per year (2012 to 2019) and 5,9% until 2020. 2020 is a bad comparison year due to change of CEO.

(On left Y-axis is the management team compensation in m€ while the right hand side represents the boards compensation in m€).

How I Traded Nokia Shares

First short-term trade was back in 2013. Bought in the beginning of the year and sold the shares at the end for a small profit. Sheet displays transactions made in 2013 with a small profit of 215,43€ or 34,32% before tax, after tax the profit was 150,80€ or 24,02% (30% tax rate on capital gains). Nokia did not pay any dividends during this period, dividend of 0,37€ was paid in July 2014.

My second trade was done in 2019 with a much smaller return as I found better investments and did not want to wait for the stock to rise. As you can see it was done in a short period from beginning of October 2019 to 11th of October. A gross profit of 0,87€ or 0,84% was made, equivalent to 0,609€ or 0,588%, considering the short period of the trade could be duplicated through the year a proper return would be made.

How could Nokia contribute with value?

Share buyback programs and reducing the amount of shares outstanding and in treasury to the extent necessary in order to still compensate board members and management team when performance is acceptable or better. This is possible as Nokia has cash, they also have short term investments that have performed poorly. Owners of Nokia would have received a better return by investing the amount in an index fund. Opportunity cost should be highlighted here. The board should be able to identify if shareholders can get a better gain somewhere else, then they should distribute the excess capital and let shareholders decide what to do, not the other way around.

These are good options for Nokias management to do their job and increase shareholder value. That is their job and that is why they are paid a lot of money, receive shares and other perks, therefore owners can demand some return. In Nokias defence they have had share buyback programs, however small and not removed most the shares. This action is not value creation, more own reward insurance. 

One additional point, 6billion euros in cash & cash equivalents is too much for a company like Nokia (Ericsson has about 3-4 billion euros in cash and has paid a dividend). It makes the management and board sloppy and slow. Comparable companies do not have that much cash and most perform better than Nokia. Maybe something for Nokias board to consider in their next meeting.

Conclusion

Nokia has lost much of owner equity with poor performance over the years and failed to convince all investors and owners. Usually it has been a serial disappointer, with some analysts focusing only on non-IFRS numbers which turned out to be a mistake. Since 2003 a Nokia owner has lost equity due to increased number of shares as well as earlier mentioned, poor performance. The equity change is smaller than the loss from market price which might hurt more. Out of 18 last years Nokia has made a loss in seven of them (2003 to 2020). If I would invest on average 4,4 billion in R&D every year, I would demand a better result than Nokia has contributed.

My own opinion about Nokia is this, for the long run it still is a poor company failing to deliver owner value yet for short term gains it is a good option. Many have made money on Nokia and many have lost a lot, focusing on the last 18 years Nokia has failed to deliver. We shall see if the new CEO Pekka Lundmark can change it for better...

I do not hold any Nokia shares at the moment, I might take short-term long positions (buy shares) in the company if I find the market price undervalued.

Portfolio Update July 2021

 During July I increased my positions a bit as all dividends were reinvested. Bought shares in AT&T, Bayer and Alibaba while wondering if any position should be decreased or liquidated. Companies or mutual funds on reduction or liquidation list is Handelsbanken Latin Amerika, DigitalBridge Group and Ventas. Made net investments, meaning I bought more than my portfolio received in cash inflow (dividends and cash from sales). Haven't been that lazy investor lately even though mainly bought companies I already have and which market value is below purchase price. For me the laziness comes from not buying and selling all the time, instead as many times mentioned, looking for value now and not worrying to much about the future.

July was interesting as on Monday 19th global stock markets dropped around 2%. Which is a big movement, I was on the buying side that day covering the pessimistic market. Bought AT&T and Bayer AG however not at their bottom. Afterwards I was disappointed of only being able to invest a small amount. Would like to have at least ten times the money to invest every month.

My Summer holiday started in July with two weeks off, will continue with two weeks end of August. Sunshine and increasing covid-19 cases was the topic of my holiday. Have people not learned anything in the last 12 months? If they just could use a mask and take care of their hygiene, we would be in a better situation today. It did not ruin my holiday or hotel stay but has made me a bit frustrated as every day you see people neglect any form of common sense.

Holiday also started with some additions to my wardrobe, did spend a lot on clothes, almost 500€ in total on a pair of shoes, pants, shirts and jackets. Lloyd shoes and Oscar Jacobsen jackets do have a fat normal price so did what I usually do, buy at discounts and off-season. 

Also spotted that I had forgotten to update my Kone Oyj position, bough one additional share back in May for 65,75€ including transaction costs. Small change yet does impact how much I have left to reach my goals. 

The portfolio return was a bit of due to the swings in currencies, have made some adjustments that will correct for the currency swings to show a more accurate and realistic return. It also corrects the currency impact in invested capital. Return is calculated on EUR basis which is impacted by current market exchange rates as well as market prices in all portfolio currencies. 

Portfolio value at end of July was 55 492,08€ or $58 513,84, have reached my short-term goal in market value however in dividends I am still behind. A short celebration of achieving one of the short-term goals this fast (mainly driven by investments). Now just focus on the dividend part as well as the long-term goal and eventually the 1-million-euro goal (once 1 million is achieve the next step might be a 5-million-euro portfolio). 

 

Portfolio Changes

Alibaba (ticker BABA)

 Increased my position in Alibaba as the price has been lower than my weighted average. Bought 5 shares and have now 14 shares in Alibaba for an price of $216,68 per share. The 5 shares were bought at $200,99 (weighted average), ranging from $209 to $191 per share. 

Main reason for the volatility is the tension between China and USA, Chinese Governments need to show its power over tech companies and US authorities demanding Chinese companies listed on their exchange to follow rules. There is nothing wrong with Alibaba, instead it is the political risk reflected in the price. Compared to Amazon which has less political risk now while higher legal risk. For me the swings are more of a opportunity to add to my position, do not see a huge risk here. Did quickly read Alibaba's annual report and did not see any big surprises or anything that worried.

 AT&T (ticker T)

Bought 4 AT&T shares in July, increasing my position from 117 to 121 shares. Weighted paid price per share decreased a bit from $30,87 to $30,79 as the four shares were bought at a price below $29 a share.

The stock price did fall below $28 after mid-July, however only bought one share… It seemed like the stock dropped after the Q2 earnings report was released and disappointments were revealed from subscription services. Apparently, Netflix lost a lot of subscribers as well. Should be logical if people only used it during lockdown and now are partially returning to their daily life or just want to do something else.

Bayer AG (ticker BAYN)

Increased my holding in Bayer by 13% or 4 shares from 30 to 34 shares. Price paid decreased a bit from 63,69€ to 62,14€. The increase was made before the latest announcement of an additional reserve impacting the result due to legal matter in US (Monsanto acquisition and Roundup products).

Did read Bayers 2020 annual report and it was represented by acquisition failure. I am thinking about Monsanto which Bayer acquired in 2018. Both the Bayer Board and Management Group has most likely lost more of shareholders money than any other legal entity (without going bankrupt). A loss of over 10€ per share, dragging down the profitable segments of Bayer. 

It seems like Roundup has become a chronic migraine for Bayer shareholders. $63 billion is what Bayer shareholders paid for Monsanto and in addition received legal costs and settlements to come and a write down of $10,9 billion. at least $73 billion has the Bayer Management team and Board of Directors caused in cost for Bayer shareholders so far, assume the payback time is more than their combined life expectancy. Let's hope they do not repeat a similar failure in the future unless they do a similar write off their salary and bonus. Yes, I am frustrated about the whole case and would fire the whole management team and ensure the board members are never again re-elected. These kinds of mistakes are hardly treated as they should be, financial damage caused due to neglect and sloppy work usually end in unemployment. Apparently once you get to the management team your failures result in reduction of normal staff while you get a bonus for bad performance. Does sound like the incentive system and responsibilities are far from aligned...

Dividends

In July I got 128,39 euros in gross dividends and net 118,12 euros. From a dividend perspective July was an uneventful month while waiting for beginning of August when AT&T dividend will be booked. Biggest single dividend came from GlaxoSmithKline with net 50,90€ or 43 % of total dividends. Kimberly-Clark was the second biggest payer with 17,06€ or 14,44% and third came iShares Asia Pacific Dividend ETF with 16,41€ or 13,89% of total dividends. Still small amounts coming in every month.

 

 

Struggling to see the possibility of dividends reaching 2 200€ this year, Telias second dividend at the end of October will be 1 300 SEK or around 128€ gross and around 109€ net of withholding tax. That will be one of the single biggest dividends coming in. To reach the 2 200€ dividend goal this year I should invest more heavily in companies that will pay the second half of their dividend this Fall or has at least one dividend payments left. This way I could maximize dividend return, problem is that companies tend to see their price increase before the ex-dividend date meaning the return drops. Lower return means you must buy more to get a significant amount in dividends. I have a tight budget, long-term goal and might therefore do more investments based on longer perspective and not the short-term 1 additional percent gain here or there with a 30% risk (poor risk adjusted return). It does explain my increased AT&T and Bayer position.

Just to make my point, I would need to have a portfolio value of around 61 000 euro with a 3,6% net dividend return to achieve the goal of 2 200€ in net dividends. Notably Alibaba and DigitalBrigde does not pay a dividend which raises the total required invested amount. Looking forward to a cooler August month and hopefully some good discounts in the market.

First company review will be published soon. Just need to finalize a few calculations.